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Bitcoin’s rocketing value is undermining its original purpose

8 December 2017

12:14 PM

8 December 2017

12:14 PM

Everyone interested in technology has their own bitcoin story. As is the way with these things, the earlier you were on the scene the better. I cashed out back in 2012 when a bitcoin was worth just £7, says one. Well, I bought a pizza in 2014 with bitcoin which, at today’s rate, cost me almost ten grand, replies another. And so on. These stories are usually told with a hint of pride. The more you lost the better in fact, since it signifies that you were in the know before everyone else, long before it was cool. I have my own story too of course, involving dark net drugs markets back in 2013, when drug pushing was the main use of bitcoin. I will tell it to anyone who listens, especially if they are Johnny-come-latelies. 

A lot of people far wiser than me kept hold of a lot of their bitcoin from those good old days, and are now insanely rich on paper, or on computer, or whatever the phrase is. These people are typically one of the following: radical libertarians, crypto-enthusiasts, fintech boffs, hackers or drug dealers (and the FBI). As bitcoin expert Dominic Frisby pointed out this week in a neat post (in which he advises everyone to sell, by the way) the idea of an alternative money system first appealed to anyone who was on the outside. 

It is no longer the currency of the outsider. The price of bitcoin just sailed past £11,000 ($15,000), which suggests that even the bellboy’s mates are now onboard. I went to a bitcoin event this week, and one of the panel speakers said she’d overheard it being discussed on the tube. ‘It works like this’, said a man to his partner. ‘You put some money in, and it just goes up, like, 1,000 per cent!’  

I wonder therefore if the people cheering on the bitcoin mania realise who they’ve got in to bed with. Bitcoin wasn’t meant to unfold in this way, with the insane speculation and accompanying headlines. I won’t explain how it all works again – just Google it – but rather the founding purpose. 

It first arrived on a cryptography mailing list in early 2008, when the concept was posted by a mysterious contributor called Satoshi Nakamoto. Satoshi distrusted the global banking system, and saw his cryptocurrency as a way to undermine it. He hated that bankers and governments held the key to the money supply and could manipulate it to their own ends. He even added an out-of-place line of text into the ‘genesis block’ (the very first bit of the blockchain—where he transferred bitcoin to a fellow libertarian poster called Hal Finney), which read:

‘The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.’

The reason there is a cap on the number of bitcoin that can ever be produced is to make sure no central governments and central banks can print more to inflate the economy for political purposes. Although bitcoins can be bought and sold with real-world currencies, new ones are not minted by any central authority: instead anyone who dedicates his or her computing power to verifying the transactions in the public leger blockchain competes to earn a very small amount of new bitcoins each time they do so (this is called ‘mining’). Satoshi designed it to be a peer-to-peer, encrypted and quasi-anonymous system, which makes linking a bitcoin transaction to a real-world person difficult, thereby making collecting taxes and monitoring users potentially awkward. 

While many of his posts to the cryptography mailing list discussed the technicalities of the new currency, he also made his loyalties clear. In his early posts, Satoshi wrote on the list to Finney that bitcoin was ‘very attractive to the libertarian viewpoint if we can explain it properly’. ‘You will not find a solution to political problems in cryptography,’ wrote one, in response. ‘Yes,’ replied Satoshi, ‘but we can win a major battle in the arms race and gain a new territory of freedom for several years.’

Satoshi’s vision therefore was of a functioning currency that could allow for peer to peer transactions between people, not simply an investment asset. In places like South America where the central banks are often highly distrusted, this was starting to look quite exciting – and in 2015 an eco-system of bitcoin traders, exchanges, shops and businesses were all taking off. I was especially excited by the prospect of bitcoin being used as a fast and cheap means of remittance payments, which could save people a small fortune.  

But all the while the value of bitcoin goes up and up and up, no-one would be stupid enough to actually spend it. Who’d buy a pizza using bitcoin at the moment? There are too many enthusiasts screaming about exciting projected values – 20 thousand by next year! One hundred thousand! John McAfee posted last week on Twitter that he’d ‘eat my dick on national television’ if bitcoin wasn’t worth £370,000 ($500,000) by 2020. (Although it’s worth remembering that these people usually own lots of bitcoin, and would rather like you to buy more as well). Volatility makes it a rubbish store of value and medium of exchange, which are of course key functions of currency.  

All the while the madness continues, the truly revolutionary power of bitcoin is on hold. The libertarian dream of secure decentralised peer to peer currency outside the central banking system is being replaced by the insanity of tulip mania. Yesterday, the game developer Valve stopped accepting bitcoin for purchases, citing its increasingly high fees and volatility.  

Perhaps it will settle soon, or maybe one of the many other crypto coins will take off, and serve the purpose meant for bitcoin. Only then will we really see the power of Satoshi’s invention, not as a weird new asset class, but rather the world changing disruptive technology it was designed to be. 


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